To Tap Arctic Oil, Russia Partners With Exxon Mobil

A Rosneft flag flies over the Russian oil giant's refinery near the city of Samara. Growth of Russia's oil and gas output has stalled, but Exxon Mobil and other foreign firms have signed deals to help exploit the Arctic.

Nikolay Korchekov
/ Reuters/Landov

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Originally published on May 25, 2012 7:09 am

Russia is still the world's largest producer of oil and gas, but growth has stalled and to get to new supplies requires going to a very difficult place — the Arctic.

"If you want to be in this business in 2020, 2025, you must think about the Arctic," says Konstantin Simonov, head of the National Energy Security Fund in Moscow.

In the past month, Moscow has signed several deals with foreign oil companies designed to maintain Russia's position as the top producer. The most important deal, and the most lucrative, is a partnership between Exxon Mobil and Russian oil giant Rosneft.

Exxon Mobil could eventually spend half a trillion dollars to look for and extract oil and gas in the Russian Arctic. The investment is enormous, but so are the potential rewards.

Getting To The Arctic's Reserves

"The reserves in the Russian Arctic are vast," says Roland Nash, chief investment strategist for Verno Investment in Moscow. "Nobody quite knows how vast, but the numbers are enormous."

Some estimates put the oil and gas reserves in Russia's Arctic waters at 100 billion tons. According to Simonov, the deal with Exxon Mobil is a sign that Russia knows it needs international investment and technology to get to those reserves.

"Without foreign partners, for us it will be impossible to develop this area," Simonov says. "It's out of [the] question."

The deal was signed on April 18 with Russian President Vladimir Putin looking on. It gives Exxon Mobil access to oil fields in the Black Sea and provides Russia some access to Exxon Mobil's oil deposits in Texas, Canada and the Gulf of Mexico.

At the signing, Putin said Exxon Mobil also had the option to work in Russia's north and south, as well as in other regions. Meanwhile, the Russians will soon start work with Exxon Mobil in the U.S. and Canada.

Changing Russia's Reputation

In addition to the Exxon Mobil deal, Russia's Rosneft recently signed smaller deals with Italian oil company Eni to go after oil in North Africa, and with Norway's Statoil elsewhere in the Arctic.

But it hasn't been easy for foreign oil companies to do business in Russia. BP had a similar deal with Rosneft that fell apart last year. According to Roland Nash, everyone knows about Russia's troubled past with international oil companies.

"Signing the deal is Step 1," Nash says. "Implementing the deal is a bigger step in some ways."

So Russia has changed the game in favor of the oil giants. The government has eased the tax burden on Exxon Mobil and others looking for oil in the Arctic, making it a more attractive proposition.

And, according to Simonov, letting Rosneft in on energy deposits elsewhere in the world turns the Russian oil giant into an international player, helping it spread its risks. There are also potential political benefits.

"It's like, you know, the logic of capitalism," Simonov says. "If you are the shareholder of serious assets in Europe and the United States, maybe there will be more reason to have political dialogue also."

Making Things Happen

The financial markets have reacted cautiously to the deal, given Russia's checkered relations with international oil companies in the past. But Nash believes it's a very good move by Exxon Mobil and by Russia.

"The real reason why Exxon Mobil should believe in this is because Russia really needs this investment. They recognize that without that investment, you're not going to be able to maintain Russia as the world's largest oil producer. You're not going to be able to get this oil out of the ground in the Arctic," he says. "When things are necessary in Russia, they tend to actually happen."

But it won't happen fast. Russia has a long-term deal with Exxon Mobil, and it's unlikely that there will be any serious production from Russia's soon-to-be explored Arctic waters until after 2020.

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RENEE MONTAGNE, HOST:

Moscow has been signing exploration deals with foreign oil companies aimed at keeping Russia the world's number one oil producer. The biggest involves Exxon Mobil. That deal could see the American oil company investing half a trillion dollars in the Russian Arctic. NPR's Mike Shuster has more from Moscow.

MIKE SHUSTER, BYLINE: Russia is still a huge supplier of oil and gas. There's no question about that. But the growth of oil and gas output in Russia has stalled.

KONSTANTIN SIMONOV: We see no serious increase in the full production in Russia.

SHUSTER: Konstantin Simonov is the head of the National Energy Security Fund in Moscow. There is, he notes, plenty of additional oil and gas to be exploited in Russia, but it's in a very difficult place: the Arctic.

SIMONOV: If you want to be in this business in 2020, 2025, you must think about the Arctic today.

ROLAND NASH: The reserves in the Russian Arctic are vast. Nobody quite knows how vast, but the numbers are enormous.

SHUSTER: Roland Nash, the chief investment strategist for Verno Investment in Moscow, says this is what Exxon Mobil is going after. Some estimates put the oil and gas reserves in Russia's Arctic waters at 100 billion tons. The deal with Exxon Mobil is also a sign that the Russian government knows it can't exploit the Arctic without investment from international oil companies and without their technology, says Simonov.

SIMONOV: Without foreign partners, for us, it will be impossible to develop this area. It's out of question.

SHUSTER: There's much more to the deal. It gives Exxon Mobil access to oil fields in the Black Sea, and it provides Russia some access to Exxon Mobil's oil deposits in Texas, in Canada and the Gulf of Mexico. The deal was signed on April 18th, with Vladimir Putin looking on.

PRESIDENT VLADIMIR PUTIN: (Russian spoken)

SHUSTER: Exxon has the possibility to work in Russia's north and its south and in other regions, Putin said. Our side will soon start work with Exxon in the U.S. and Canada. It's not been easy for foreign oil companies to do business in Russia. Everybody knows, says Roland Nash, that Russia's relations with international oil companies in the past have been troubled.

NASH: Signing the deal is step one. Implementing the deal is a bigger step, in some ways.

SHUSTER: So Russia has changed the game in favor of the oil giants. The government has eased the tax burden on Exxon Mobil and others looking for oil in the Arctic, making it a more attractive proposition. And, Konstantin Simonov says, letting Rosneft in on energy deposits elsewhere in the world turns the Russian oil giant into an international player. It helps it spread its risks, and there could be political benefits, as well.

SIMONOV: It's like, you know, the logic of capitalism. If you are the shareholder of serious assets in Europe and United States, maybe it will be more reason to have political dialogue, also.

SHUSTER: The financial markets have reacted cautiously to the deal, given Russia's checkered relations with international oil companies in the past. But Roland Nash believes it's a very good move by Exxon Mobil and for Russia.

NASH: The real reason why Exxon Mobil should believe in this is because Russia really needs this investment. They recognize that without that investment, you're not going to be able to maintain Russia as the world's largest oil producer. You're not going to be able to get this oil out of the ground in the Arctic. When things are necessary in Russia, they tend to actually happen.

SHUSTER: Still, this is a long-term deal with Exxon Mobil. It is unlikely that there will be any serious production from Russia's soon-to-be explored Arctic waters until after 2020. Mike Shuster, NPR News, Moscow. Transcript provided by NPR, Copyright NPR.